<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission File Number: 0-18533
--------
LETCHWORTH INDEPENDENT BANCSHARES CORPORATION
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 16-1168175
- ---------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
50 North Main Street Box 129 Castile NY 14427
-----------------------------------------------------
(Address of principal executive offices) (Zip Code)
(716) 493-2576
----------------
Registrant's telephone number, including area code)
____________________________________________________________
(Former name, address, fiscal year, if changed)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(b) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Y Yes No
-------- ------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of July 31, 1998
- ------------------------------------------------------------------
Common Stock, $1.00 per share 3,389,150 shares
Transitional Small Business Disclosure Format (Check One):
Yes No X
-- -
1
<PAGE>
LETCHWORTH INDEPENDENT BANCSHARES CORPORATION
INDEX
Page
PART I Financial Information
Item 1. Financial Statements
Consolidated Statement of Condition (Unaudited)
June 30, 1998 and December 31, 1997 3
Consolidated Statement of Income (Unaudited)
Three and Six Months Ended June 30, 1998
and 1997 4
Consolidated Statement of Comprehensive Income
(Unaudited)Three and Six Months Ended June 30, 1998
and 1997 5
Consolidated Statement of Cash Flows (Unaudited)
Six Months Ended June 30,1998 and 1997 6
Notes to Consolidated Financial Information 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12
PART II Other Information
Item 4 Submission of matters to a vote of security holders 18
Item 6 Exhibits and Reports on Form 8-K 19
Signatures 21
Exhibit 3(d) 22
Exhibit 11 23
2
<PAGE>
LETCHWORTH INDEPENDENT BANCSHARES CORPORATION
---------------------------------------------
CONSOLIDATED STATEMENT OF CONDITION
-----------------------------------
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------------- ------------------
<S> <C> <C>
Assets
------
Cash and due from banks $ 8,435,538 $ 10,863,023
Federal funds sold 2,825,000 1,550,000
Securities available for sale, 34,968,016 34,356,500
Securities held to maturity, market value of 36,988,091 43,109,322
$38,162,736 and $44,242,300, respectively
Other securities 1,949,851 1,702,331
Loans, net of allowance for loan losses of
$2,194,572 and $2,028,600, respectively 170,589,161 157,943,432
Accrued interest receivable 1,870,330 1,740,101
Premises and equipment, net 6,530,279 6,419,871
Other assets 2,339,126 2,254,116
------------ ------------
Total Assets $266,495,392 $259,938,696
------------ ------------
Liabilities and Shareholders' Equity
- ------------------------------------
Deposits:
Noninterest-bearing $ 31,257,533 $ 32,083,730
Interest-bearing 192,452,146 185,121,594
------------ ------------
Total deposits $223,709,679 $217,205,324
Securities sold under agreements to repurchase 1,722,913 1,673,911
Accrued interest payable 976,392 810,382
Accrued taxes and other liabilities 891,924 677,005
Advances from Federal Home Loan Bank 7,607,802 7,812,302
------------ ------------
Total Liabilities $234,908,710 $228,178,924
------------ ------------
Shareholders' equity:
Common stock, par value $1.00 per share,
5,000,000 and 1,500,000 shares authorized,
respectively and 3,389,150 and 1,124,852 $ 3,389,150 $ 1,124,852
shares issued, respectively
Capital surplus 12,304,006 14,436,634
Retained earnings 17,465,546 16,428,534
Treasury stock at cost (73,086 shares) (1,356,321) 0
Unearned employee stock ownership plan shares (490,654) (539,320)
Accumulated other comprehensive income 274,955 309,072
------------ ------------
Total shareholders' equity $ 31,586,682 $ 31,759,772
------------ ------------
Total Liabilities and Shareholders' Equity $266,495,392 $259,938,696
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE>
LETCHWORTH INDEPENDENT BANCSHARES CORPORATION
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Month Ended
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans $4,070,471 $3,617,521 $ 7,920,593 $7,072,424
Interest on investment securities
Taxable 703,582 804,158 1,502,107 1,636,196
Tax-exempt 383,790 313,647 779,048 626,473
Interest on federal funds sold 44,221 74,178 100,478 124,833
------------------ ------------- ------------------- ------------
Total interest income $5,202,064 $4,809,504 $10,302,226 $9,459,926
Interest on deposits and advances 2,204,750 1,961,717 4,367,999 3,853,572
----------------- -------------- ------------------- ------------
Net interest income $2,997,314 $2,847,787 $ 5,934,227 $5,606,354
Provision for possible loan losses 124,998 68,687 256,420 162,290
------------------ ------------- ------------------- ------------
Net interest income after
provision for possible loan losses $2,872,316 $2,779,100 $ 5,677,807 $5,444,064
------------------ ------------- ------------------- ------------
Other operating income:
Service charges on deposit accounts $ 268,780 $ 235,729 $ 541,710 $ 465,611
Other charges and fees 40,232 22,538 56,950 41,687
Other operating income: 62,903 13,348 111,650 75,031
Net (losses) gains on sales of
loans and investment securities (522) 29,642 20,905 37,657
------------------ ------------- ------------------- ------------
Total other operating income $ 371,393 $ 301,257 $ 731,215 $ 619,986
------------------ ------------- ------------------- ------------
Other operating expenses:
Salaries and employee benefits $1,099,427 $1,026,197 $ 2,197,890 $1,992,787
Occupancy expense 129,538 128,626 264,488 256,377
Printing and supplies 74,364 71,774 140,553 148,652
Equipment expense 234,738 174,646 467,589 380,446
FDIC assessment 9,758 15,259 19,752 19,045
Other operating expenses 602,601 552,787 1,087,191 1,040,232
------------------ ------------- ------------------- ------------
Total other operating expense $2,150,426 $1,969,289 $ 4,177,463 $3,837,539
Income before income taxes 1,093,283 1,111,068 2,231,559 2,226,511
Provision for income taxes 319,400 343,000 657,400 717,500
------------------ ------------- ------------------- ------------
Net Income $ 773,883 $ 768,068 $ 1,574,159 $1,509,011
================== ============= =================== ============
Basic earnings per share $0.24 $0.27 $0.48 $0.54
Diluted earnings per share $0.23 $0.25 $0.46 $0.49
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE>
LETCHWORTH INDEPENDENT BANCSHARES CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Month Ended
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net Income $773,883 $768,068 $1,574,159 $1,509,011
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains (losses)
arising during period (26.683) 55,658 (23,461) (24,839)
Less: reclassification adjustments
for gains included in net
income 669 (17,000) (10,656) (19,402)
--------------- --------------- --------------- ---------------
Other comprehensive income, net of tax: (26,014) 38,658 (34,117) (44,241)
--------------- --------------- --------------- ---------------
Comprehensive income $747,869 $806,726 $1,540,042 $1,464,770
=============== =============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements
5
<PAGE>
LETCHWORTH INDEPENDENT BANCSHARES CORPORATION
---------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
------- ------
<S> <C> <C>
Cash flows from operating activities:
Net income $1,574,159 $ 1,509,011
Adjustments to reconcile net income to
net cash provided by operating activities-
Depreciation and amortization 429,890 473,814
Provision for possible loan losses 256,420 162,290
ESOP compensation expense 77,333 112,584
Gain on sale of investments (17,334) (36,850)
Gain on sale of loans (3,571) (807)
Increase in interest receivable (130,229) (84,686)
Increase in other assets (130,246) (81,272)
Increase in interest payable 166,010 80,454
Increase(decrease) in accrued taxes
and other liabilities 214,919 (504,534)
------------------- ------------
Net cash provided by operating activities $2,437,351 $ 1,630,004
------------------- ------------
Cash flows from investing activities:
Proceeds from sales of securities-available
for sale $1,670,119 $ 4,028,594
Proceeds from calls and maturities of securities:
Held to maturity 7,914,119 2,352,061
Available for sale 5,626,450 2,144,629
Proceeds from sale of loans 478,392 340,250
Purchases of securities:
Held to maturity (2,042,351) (3,952,904)
Available for sale (7,922,925) (3,035,277)
Net increase in loans (13,376,970) (4,013,101)
Expenditures for capital assets (470,729) (219,395)
------------------- ------------
Net cash (used in)provided by investing activities ($8,123,895) ($2,355,143)
------------------- ------------
Cash flows from financing activities:
Net decrease in demand deposits, NOW
accounts and money market accounts $36,619 ($3,692,385)
Net increase(decrease) in time deposits 6,467,736 (467,648)
Repayment FHLB borrowings (204,500) (227,446)
Exercise of options and warrants 78,670 207,050
Purchase of treasury stock (1,356,321) 0
Net repurchase agreements 49,002 1,996,554
Dividends paid (537,147) (380,405)
------------------- ------------
Net cash provided by (used in) financing activities $4,534,059 ($2,564,280)
------------------- ------------
Net decrease in cash and cash equivalents ($1,152,485) ($3,289,419)
Cash and cash equivalents, beginning of year 12,413,023 11,565,746
------------------- ------------
Cash and cash equivalents, end of quarter $11,260,538 $ 8,276,327
------------------- ------------
Interest paid $4,201,989 $ 3,934,026
------------------- ------------
Income taxes paid $520,000 $ 380,003
------------------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements
6
<PAGE>
LETCHWORTH INDEPENDENT BANCSHARES CORPORATION
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL INFORMATION
-------------------------------------------
June 30, 1998
-------------
Note 1 Basis of Presentation
- ----------------------------
The unaudited interim financial information includes the accounts of Letchworth
Independent Bancshares Corporation and its subsidiary, The Bank of Castile. The
financial information has been prepared in accordance with the Summary of
Significant Accounting Policies as outlined in the Company's Form 10-KSB for the
year ended December 31, 1997 and, in the opinion of management contains all
adjustments necessary to present fairly the Company's financial position as of
June 30, 1998 and December 31, 1997, the results of its operations for the three
and six month periods ended June 30, 1998 and 1997, respectively, and its cash
flows for the six month periods ended June 30, 1998 and 1997, respectively.
The accounting policies of the Company conform with generally accepted
accounting principles and prevailing practices within the banking industry. The
preparation of financial information in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial information and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
These notes should be read in conjunction with the notes to the consolidated
financial statements incorporated in the Letchworth Independent Bancshares
Corporation 1997 Annual Report and Form 10-KSB.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards (SFAS) No. 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125," was issued in
December 1996 and deferred until January 1, 1998, the effective date for certain
provisions of SFAS No. 125 relating to repurchase agreements, dollar roll,
securities lending and similar transactions and pledged collateral. SFAS No. 127
has been adopted by the Company in the first quarter of 1998, as required, and
has not had a material impact on the Company's results of operations.
Note 2 Stock Split
- ------------------
On May 7, 1998, the shareholders approved an increase in the authorized shares
of common stock of the Company from 1,500,000 shares, par value $1.00 per share,
to 5,000,000 shares, par value $1.00 per share, as well as a three for one stock
split effective for shareholders of record on May 8, 1998. The stock split has
been recorded as of March 31, 1998, by a transfer of $2,251,904 from Capital
surplus to common stock, representing $1.00 par value for each additional share
issued. All share and per share data has been retroactively restated to reflect
the split.
7
<PAGE>
Note 3 Comprehensive Income
- ---------------------------
In the first quarter, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and displaying
comprehensive income and its components. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
The Company has chosen to disclose comprehensive income in a separate statement,
in which the components of comprehensive income are displayed net of income
taxes. The following table sets forth the related tax effects allocated to each
element of comprehensive income for the three months ended June 30, 1998 and
1997:
<TABLE>
<CAPTION>
Three Months Ended June 30, 1998 Six Months Ended June 30, 1998
Tax Tax
Before-tax (Expense) Net-of-Tax Before-tax (Expense) Net-of-Tax
Amount or Benefit Amount Amount or Benefit Amount
Unrealized gains (losses)on
securities:
Unrealized holding gains
<S> <C> <C> <C> <C> <C> <C>
arising during period (78,303) 51,620 (26,683) (38,163) 14,702 [23,461]
Less: reclassification
adjustment for gains
realized in net income 1,963 (1,294) 669 (17,334) 6,678 [10,656]
-------------- --------------- ------------ --------------- -------------- ----------
Net unrealized (loss) gain (76,340) 50,326 (26,014) (55,497) 21,380 [34,117]
-------------- --------------- ------------ --------------- -------------- ----------
Other comprehensive (loss) income (76,340) 50,326 (26,014) (55,497) 21,380 [34,117]
-------------- --------------- ------------- -------------- -------------- ----------
Three Months Ended June 30, 1997 Six Months Ended June 30, 1997
Tax Tax
Before-tax (Expense) Net-of-Tax Before-tax (Expense) Net-of-Tax
Amount or Benefit Amount Amount or Benefit Amount
Unrealized gains (losses)on
securities:
Unrealized holding gains
arising during period 13,936 41,722 55,658 (47,177) 22,338 (24,839)
Less: reclassification
adjustment for gains
realized in net income (28,333) 11,333 (17,000) (36,850) 17,448 (19,402)
-------------- --------------- ------------- -------------- -------------- ----------
Net unrealized gain (loss) (14,397) 53,055 38,658 (84,027) 39,786 (44,241)
-------------- --------------- ------------- -------------- -------------- ----------
Other comprehensive income (loss) (14,397) 53,055 38,658 (84,027) 39,786 (44,241)
-------------- --------------- ------------- -------------- -------------- ----------
</TABLE>
8
<PAGE>
The following table sets forth the components of accumulated other comprehensive
income for the three months ended June 30, 1998 and 1997:
Six Months Ended
June 30,
1998 1997
---- ----
Beginning balance $309,072 $162,869
Unrealized gains on securities, net (34,117) 19,081
-------- --------
Ending balance $274,955 $181,950
-------- --------
Note 4 Investment Securities
- ----------------------------
The book and approximate market
value of investment securities
at:
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
Amortized Cost Market Value Amortized Cost Market Value
--------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Available for Sale
- ------------------
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $11,548,337 $11,780,219 $14,920,070 $15,186,700
State and political subdivision
obligations 8,033,876 8,154,928 4,812,298 4,923,200
Mortgage-Backed Securities 14,980,349 15,032,869 14,163,181 14,246,600
----------- ----------- ----------- -----------
$34,562,562 $34,968,016 $33,895,549 $34,356,500
----------- ----------- ----------- -----------
Held to Maturity
- ----------------
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $ 9,702,082 $ 9,866,352 $11,958,264 $12,168,400
State and political subdivision
obligations 22,050,715 23,040,344 24,961,440 25,853,700
Mortgage-Backed Securities 5,235,294 5,256,040 6,189,618 6,220,200
----------- ----------- ----------- -----------
$36,988,091 $38,162,736 $43,109,322 $44,242,300
----------- ----------- ----------- -----------
</TABLE>
9
<PAGE>
Note 5 Loans
- ------------
Loans consist of the following:
June-30 December-31
1998 1997
------- ----------
Residential real estate $ 51,745,123 $ 49,158,726
Commercial real estate 38,939,529 35,046,889
Commercial and industrial loans 36,086,807 33,616,025
Agricultural loans 30,910,999 31,563,146
Consumer loans 15,101,275 10,587,246
------------ ------------
$172,783,733 $159,972,032
------------ ------------
An analysis of changes in the
allowance for possible loan losses
is as follows:
June 30, June 30,
1998 1997
---------- --------
Balance, beginning of year $2,028,600 $1,841,200
Chargeoffs: 109,471 95,268
Recoveries: 19,023 8,058
Net charge-offs 90,448 87,210
---------- ----------
Additional charges to operations 256,420 162,290
---------- ----------
Balance, end of period $2,194,572 $1,916,280
========== ==========
The following table summarized the Company's non-performing loans at the dates
indicated.
June 30,
1998 1997
------- -------
Non-accruing loans 753,823 287,350
Accruing loans past due 90 days or more 85,061 252,399
Renegotiated loans 0 0
The average balance of impaired loans during the first six months of 1998 was
approximately $623,651. At June 30, 1998, the balance of impaired loans and
related reserve against that balance was $591,003 and $114,512, respectively.
The average balance of impaired loans during the first six months of 1997 was
approximately $352,950. At June 30, 1997, the balance of impaired loans and
related reserve against the balance was $347,845 and $116,716, respectively.
Interest income recognized on impaired loans and interest income recognized on a
cash basis was not significant
10
<PAGE>
Note 6 Earnings Per Share
- -------------------------
The calculations of basic and diluted earnings per share are as follows:
<TABLE>
<CAPTION>
Quarter Ended Six Month Ended
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Income available to common shareholders $ 773,883 $ 768,068 $1,574,159 $1,509,011
BASIC EARNINGS PER SHARE
Weighted average shares outstanding 3,289,564 2,806,431 3,287,355 2,797,777
Basic earnings per share $ 0.24 $ 0.27 $ 0.48 $ 0.54
--------------- ---------------- --------------- ---------------
DILUTED EARNINGS PER SHARE
Weighted average shares outstanding 3,289,564 2,806,431 3,287,355 2,797,777
Dilitive effect of:
Stock options 94,603 102,681 99,379 283,620
Adjusted weighted average shares
outstanding 3,384,167 3,088,179 3,386,832 3,081,397
Diluted earnings per share $ 0.23 $ 0.25 $ 0.46 $ 0.49
--------------- ---------------- --------------- ---------------
</TABLE>
11
<PAGE>
LETCHWORTH INDEPENDENT BANCSHARES CORPORATION
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 1998
FINANCIAL CONDITION
Total assets of Letchworth Independent Bancshares Corporation (the "Company")
were $266.5 million as of June 30, 1998, an increase of $6.6 million, or 2.52%,
above total assets at December 31, 1997. Deposits, the Company's primary source
of funds, increased $6.5 million from December 31, 1997, or 2.99%, to $223.7
million at June 30, 1998. The increase in deposits occurred primarily in the
certificate of deposit category.
Total loans outstanding as of June 30, 1998 were $170.6 million, which
represented an increased by $12.6 million, or 8.01%, over total loans at
December 31, 1997. The total loans outstanding is net of loans sold and the
allowance for loan losses. The increase of total loans as of June 30, 1998, was
the result of the following: Residential real estate loans increased by $2.6
million or 5.26%; commercial real estate loans increased $3.9 million or 11.11%;
agricultural loans decreased $.6 million or 2.07%; commercial and industrial
loans increased $2.5 million or 7.35%; and consumer loans increased $4.5 million
or 42.64%. The increase in consumer loans during the first six month period of
1998, is primarily attributable to the Company's new indirect lending program.
This program generates auto loans through relationships with local dealers.
"Potential problem loans" consist of loans which are generally secured and not
currently considered nonperforming, but where information about possible credit
problems has caused management to have doubts as to the ability of such
borrowers to comply with present payment terms. As of June 30, 1998, the Company
considers $2,097,0116 to be "potentially problem loans", as described above.
Historically, however, only a very small portion of those loans have resulted in
actual losses for the Company.
Nonaccrual loans totaled $753,823 as of June 30, 1998, compared to $287,350 as
of June 30, 1997. The increase in nonaccrual loans results from several
commercial credits being placed in this category during the past twelve months.
While this represents a significant increase, the Company is aggressive at
identifying and dealing with problem loan situations. Further, management
believes that the loan loss allowance is adequate to cover any expected losses.
The Company's shareholders' equity decreased to $31.6 million, a decrease of
.54% or $.2 million from December 31, 1997. The decrease in shareholders equity
is attributed to the repurchase of the Company's common stock, in the form of
treasury stock, offset the effect of retained earnings. As of July 31, 1998, the
Company had repurchased 73,08shares of common stock at an aggregate purchase
price of $18.56
12
<PAGE>
The Risk-based capital ratios are a very good indicator of the Company's
financial soundness. As of June 30, 1998, the Company had a Tier 1 capital
ratio of 18.57%, a total capital ratio of 19.82%, and a Tier 1 leverage ratio of
11.52%. Each of these ratios compares favorably with the regulatory minimum
requirements of 4.00%, 8.00%, and 4.00%, respectively.
Liquidity measures the ability of the Company to meet its maturing obligations
and existing commitments, to withstand fluctuations in deposit levels, to fund
its operations, and to provide for customer credit needs. At June 30, 1998, the
Company sold $2.8 million in federal funds. These funds are available on one
day notice to meet upcoming obligations. However, due to the low return
available on federal funds, the Company has attempted to minimize the level of
federal funds while maintaining adequate daily liquidity. Pursuing this
aggressive cash policy may cause the Company to experience a negative excess
cash position at certain times. As additional sources of liquidity, the Company
may also sell loans on the secondary market or participate large commercial
loans with other financial institutions. The Company also utilizes its line of
credit with the Federal Home Loan Bank of New York as a short-term and longer-
term funding.
13
<PAGE>
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE
MONTHS ENDED JUNE 30, 1997
Net income of $773,883 for the three months ended June 30, 1998 represents an
increase of 5,815 or .76%, over the $768,068 earned during the same period ended
June 30, 1997. Net income (diluted) per common share and common share
equivalent was $.23 for the three months ended June 30, 1998. (See Exhibit 11 of
this Quarterly Report on Form 10-QSB) This decrease from the $.25 per share
figure for the same period in 1997 was due to an increase in the number of
outstanding shares of common stock caused by the exercise of the remainder of
outstanding warrants previously issued by the Company.
Net interest income was $3.0 million for the three months ended June 30, 1998,
up 5.25% from the $2.8 million earned during the three months ended June 30,
1997. Increased volume in the loan portfolio was the primary reason for the
increase in interest income during the second quarter of 1998. Interest expense
on deposits increased by $243,033.
The provision for possible loan losses, the charge to earnings for potential
credit losses associated with lending activities, was $124,998 for the three
months ended June 30, 1998, up 81.98% from the $68,687 provision recorded during
the three months ended June 30, 1997. This increase in the provision for
possible loan losses in 1998 was in part due to the increase in charge-offs
compared with 1997 and with the additional accrual for the increase in loan
volume. Gross charge-offs were $109,471 in the second quarter of 1998, compared
to $95,268 for the same period last year. Management conducts a periodic
evaluation which assigns risk weights for individual loans and different classes
of loan groups in determining the adequacy of the reserve. Regulatory
examination, historical gross loans, an assessment of prevailing and anticipated
economic conditions and other relevant factors are used in this analysis.
Management of the Company believes this analysis indicates that the level of the
loan loss reserve is adequate to absorb any potential losses inherent in the
loan portfolio at June 30, 1998. The allowance for possible loan losses of the
Company at June 30, 1998 was $2,194,572 or 1.27% of total loans and is up 8.18%
or $165,972 from the allowance at December 31, 1997. Other operating income for
the three month period ended June 30, 1998 was 371,393, compared to 301,257 for
the same period in 1997. This increase is partially attributed to revisions made
in deposit fees and service charges.
Other operating expense for the three month period ended June 30, 1998 was
$2,150,426, an increase of 9.2% over the $1,969,289 recorded for the same period
in the prior year. The majority of these increases occurred in equipment expense
which increased by $60,092 or 34.41%; and salaries and employee benefits expense
which increased by $73,230 or 7.14%. The increase in equipment expense was due
largely to the increase in maintenance contracts and the addition of the branch
office in the Village of Geneseo (See Other Events of Significance in this From
10-QSB). Several new staff positions, as well as an increase in ESOP expense
attributed to the rise in the market vale of the Company's stock, account for
the increase in salaries and benefits. In addition, the FDIC assessment
decreased by $5,501 or 56.37%.
14
<PAGE>
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS
ENDED MARCH 30, 1997
Net income of $1,574,159 for the six months ended June 30, 1998 represents an
increase of $65,148 or 4.32%, over the $1,509,011 earned during the same period
ended June 30, 1997. Net income (diluted) per common share and common share
equivalent was $.46 for the six months ended June 30, 1998. (See Exhibit 11 of
this Quarterly Report on Form 10-QSB) Although this represents a decrease when
compared to the $.49 per share figure for the same period in 1997, the quarters
earnings per share figure was affected by an increase in the number of
outstanding shares of common stock due to the exercise of the remainder of
outstanding warrants previously issued by the Company.
Net interest income was $5.9 million for the six months ended June 30, 1998, up
5.85% from the $5.6 million earned during the six months ended June 30, 1997.
Increased volume in the loan portfolio was the primary reason for the increase
in interest income during the first quarter of 1998. Interest expense on
deposits increased by $514,427.
The provision for possible loan losses, the charge to earnings for potential
credit losses associated with lending activities, was $256,420 for the six
months ended June 30, 1998, up 58.00% from the $162,290 provision recorded
during the six months ended June 30, 1997. This increase in the provision for
possible loan losses in 1998 was in part due to the increase in charge-offs
compared with 1997 and with the additional accrual for the increase in loan
volume. Gross charge-offs were $109,471 in the first six month period of 1998,
as compared to $95,268 for the same period last year. Management conducts a
periodic evaluation which assigns risk weights for individual loans and
different classes of loan groups in determining the adequacy of the reserve.
Regulatory examination, historical gross loans, an assessment of prevailing and
anticipated economic conditions and other relevant factors are used in this
analysis. Management of the Company believes this analysis indicates that the
level of the loan loss reserve is adequate to absorb any potential losses within
the loan portfolio. The allowance for possible loan losses of the Company at
June 30, 1998 was $2,194,572 or 1.29% of total loans and is up 8.18% or $165,972
from the allowance at December 31, 1997. The allowance for possible loan losses
of the Company at June 30, 1997 was $1,916,280 or 1.21% of total loans at
December 31, 1997.
Other operating expense for the six month period ended June 30, 1998 was
$4,177,463, an increase of 8.86% over the $3,837,539 recorded for the same
period in the prior year. The majority of these increases occurred in equipment
expense which increased by $87,143 or 22.91%; and salaries and employee benefits
expense which increased by $205,103 or 10.29%. The increase in equipment expense
was due largely to the increase in maintenance contracts and the addition of the
branch office in the Village of Geneseo (See Other Events of Significance in
this From 10-QSB). Several new staff positions, in addition to annual
compensation increase , account for the increase in salaries and benefits.
15
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS:
Statement of Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" is required to be adopted by January 1,
2000. However, earlier adoption is allowed, beginning on July 1, 1998. In
conjunction with adoption of this standard, banks would be allowed another
opportunity to transfer investments out of the held-to-maturity category into
the available-for-sale category. These instruments would then be available to be
used in banks' future hedging activities. The Company is evaluating the effect
of adopting this standard.
16
<PAGE>
OTHER EVENTS OF SIGNIFICANCE:
On January 5, 1998, The Bank of Castile opened its 11th office in the village of
Geneseo. The office is located in the same building as the U.S. Post Office in
the central business district of Geneseo, and is approximately a block form the
State University of New York at Geneseo campus. The office is presently meeting
management's expectations with almost $4 million in deposits and $2 million in
loans.
The Geneseo office also houses the Bank's new "Trust and Investment Department"
which was developed in cooperation with the Tompkins County Trust Company of
Ithaca, New York. We received approval from the appropriate regulators in the
third quarter of 1997 and began offering the services shortly thereafter. The
results at this point have far exceeded expectations with about $14 million
under management.
During the fourth quarter of 1997, the Board of Directors approved a program to
allow for the repurchase of up to $2 Million in Company common stock and
warrants. As of June 30, 1998 the Company had repurchased 16,000 warrants at an
average price of $26.84 and 73,086 shares at an average price of $18.56. There
are no plans at this point to repurchase any further shares under this program.
Management of the Company believes that the Company is well positioned to take
advantage of growth opportunities that allow the Company to utilize its capital.
17
<PAGE>
YEAR 2000 PROJECT
The financial services industry relies extensively on computer programs with
dates. Many existing computer programs were written using only the last two
digits to identify the applicable year. These programs were designed and
developed without considering the impact of the upcoming century. Computer
programs that have date-sensitive software may, therefore, recognize a date
using "00" as the year 1900 rather than the year 2000. The potential exists that
such a mistake could result in system failures or miscalculations causing
disruptions of operations not only for the Company but for its commercial
customers who rely on computer software in managing their businesses. The Board
of Directors has assigned the responsibility for the Year 2000 remediation
process to the Data Processing Manager, who will report to the Risk Committee.
An inventory of all affected systems has been completed and prioritized.
The latest update to the Bank's core processing system was installed during May
1998. Management believes that this will make the Bank's core system "Year 2000"
compliant. The Bank has contacted all other critical vendors to discuss their
Year 2000 remediation plans, and management is in the process of reviewing their
responses. There are other areas that need to be addressed and management
believes that the Company is on target for complete compliance by year end 1998.
The Company presently believes that the Year 2000 problem will not pose
significant operational problems or have significant impact on its financial
condition, results of operations or cash flows. However, if the third party
modification plans are not completed and tested on a timely basis, the Year 2000
issue may have a material impact on the operations of the Company.
The Company has taken a proactive approach to increase Year 2000 compliance of
its commercial customers. At a recent seminar held for the Banks commercial
customers a representative from the Federal Reserve Bank specifically addressed
the Year 2000 compliance issue. Additionally a series of letters regarding Year
2000 compliance were mailed to all commercial customers.
18
<PAGE>
OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders of the Company which was held on
May 7, 1998, Stanley J. Harmon was re-elected as a director of the Company for a
term of three (3) years, and Patrick J. Dalton was elected as a director of the
Company for a term of three (3) years. In addition , the shareholders of the
Company (a) approved an amendment to the Certificate of Incorporation of the
Company to (i) increase the number of shares of common stock which the Company
authorized to issue from 1,500,000 shares to 5,000,000 shares and (ii) change
each share of outstanding common stock into three (3) shares of common stock,
(b) approved the Letchworth Independent Bancshares Corporation Stock Option Plan
of 1998 and the reservation of 500,000 shares of common stock for issuance
thereunder, and (c) elected PriceWaterhouseCoopers, LLP as independent
accountants of the Company for the year ending December 31, 1998. Of the total
of 1,125,852 shares of common stock outstanding and eligible to vote at the
Annual Meeting, 992,110 shares of common stock were voted as follows:
1. Election of Directors:
---------------------
Nominee For Withheld Authority
-------- ----- ------------------
Stanley J. Harmon 915,092 7,018
Patrick J. Dalton 914,592 7,518
2. Proposal to Amend Certificate of Incorporation:
-----------------------------------------------
For Against Abstain
----- -------- ---------
912,961 3,800 3,831
3. Proposal to Approve and Adopt Letchworth Independent Bancshares
Corporation Stock Option Plan of 1998:
For Against Abstain
----- -------- ---------
655,329 41,862 23,806
4. Proposal to Approve Selection of PriceWaterhouseCoopers, LLP:
For Against Abstain
----- --------- ---------
913,183 4,340 4,587
19
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to Exhibits
3(a) Certificate of Incorporation of Registrant filed by the New York
Department of State on July 17, 1981, incorporated by reference to the
Registrant's Registration Statement on Form S-18 (Reg. No. 33-31149-NY), filed
with the commission on September 2, 1989 and wherein such Exhibit is designed
Exhibit 3(a).
3(b) Certificate of Amendment of Certificate of Incorporation of Registrant
filed by the New York Department of State on July 26, 1989, incorporated by
reference to the Registrant's Registration Statement on Form S-18 (Reg. No. 33-
31149-NY), filed with the Commission on September 2, 1989, and wherein such
Exhibit is designated Exhibit 3(b).
3(c) Certificate of Amendment of Certificate of Incorporation of Registrant
filed by the New York Department of State on May 2, 1990, incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1990 and filed with the Commission on August 9, 1990, and wherein
such Exhibit is designed Exhibit (4)b.
3(d) Certificate of Amendment of Certificate of Incorporation of Registrant
filed by the New York Department of State on May 15,1998.
3(e) Bylaws of Registrant, as amended by the stockholders of the Registrant at
a special meeting of stockholders on July 11, 1989, incorporated by reference to
the Registrant's Registration Statement on From S-18 (Reg. No. 33-31149-NY),
filed with the Commission on September 2, 1989 and wherein such Exhibit is
designated Exhibit 3(c).
4(a) Form of Common Stock Certificate of Registrant, incorporated by reference
to the Registrant's Amendment No. 1 to Form s-18 Registration Statement (Reg.
No. 33-31149-NY), filed with the Commission on October 31, 1989, and wherein
such Exhibit is designated Exhibit 4.
4(b) Letchworth Independent Bancshares Corporation Stock Option Plan of 1990
and form of Stock Option Agreement, incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990
and filed with the Commission on August 9, 1990, and wherein such Exhibit is
designated Exhibit 4.
4(c) Letchworth Independent Bancshares Corporation Stock Option Plan
of 1998.
11 Computation of Basic and Diluted Earnings Per Share for the quarter ended
June 30, 1998 is presented on Exhibit 11 of this Report on Form 10-QSB.
(b). The Registrant did not file any current reports on Form 8-K during the
quarter ended June 30, 1998.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LETCHWORTH INDEPENDENT BANCSHARES CORPORATION
Date 5/8/98 /s/ James W. Fulmer
------ -----------------------------------
James W. Fulmer
President & Chief Executive Officer
Date 5/8/98 /s/ Steven C. Lockwood
------ -----------------------------------
Steven C. Lockwood
Treasurer & Chief Financial Officer
21
<PAGE>
Exhibit 3(d)
CERTIFIACTE OF AMENDMENT of CERTIFICATE OF INCORPORATION of LETCHWIRTH
INDEPENDENT
BANCSHARES CORPORATION under Section 805 of the Business Corporation Law
We, James W. Fulmer and Stanley J. Harmon, the President and Secretary,
respectively, of LETCHWORTH INDEPENDENT BANCSHARES CORPORATION, hereby certify:
1. The name of the corporation is LETCHWORTH INDEPENDENT BANCSHARES
CORPORATION.
2. The certificate of incorporation was filed by the Department of
State on July 17, 1981.
3. The Certificate of Incorporation, as now in full force and effect,
is hereby amended, as authorized by section 801 of the Business
Corporation Law to change the 1,500,000 authorized shares of
common stock, having a par value of $1.00 each, into 5,000,000
authorized shares of common stock, having a par value of $1.00
each.
4. Paragraph 4 of the Certificate of Incorporation which refers to
the number of authorized shares of common stock is amended to read
as follows:
"The aggregate number of shares which the corporation is
authorized to issue is 5,000,000 shares all of which shall be
common stock having a par value o $1.00 each".
5. The number of authorized shares of common stock is 1,500,000 all
of which have a par value of $1.00 each, of which 1,128,700 are
issued and outstanding. The terms of the change are such that each
share of the issued and outstanding common stock having a $1.00
par value will become three (3) shares of common stock having a
par value of $1.00 each. After giving effect to the change, the
number of shares of common stock issued and outstanding shall be
3,386,100 all of which shall have a par value of $1.00 each, and
1,613,900 shares of common stock shall be authorized and
unissued , all of which shall have a par value of $1.00 each.
6. The foregoing amendment to the Certificate of Incorporation was
duly authorized by the Board of Directors at a meeting held on
January 15, 1998, followed by the vote of the holders of a
majority of all outstanding shares entitled to vote thereon at the
Annual Meeting of Shareholders on May 7, 1998.
IN WITNESS WHEREOF, we have executed this Certificate of Amendment to
the Certificate of Incorporation and affirm the truth of the statements herein
set forth under penalty of perjury this 7th day of May, 1998.
/s/ James W. Fulmer, President
--------------------------------
James W. Fulmer
President
/s/ Stanley J. Harmon, Secretary
--------------------------------
Stanley J. Harmon
Secretary
22
<PAGE>
LETCHWORTH INDEPENDENT BANCSHARES CORPORATION
---------------------------------------------
COMPUTATION OF EARNINGS PER SHARE
---------------------------------
June 30, 1998
-------------
Exhibit 11:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1998
<S> <C> <C>
Income available to common shareholders $ 773,883 $1,574,159
BASIC EARNINGS PER SHARE
Weighted average shares outstanding 3,289,564 3,287,355
Basic earnings per share $ 0.24 $ 0.48
--------------------- --------------------
DILUTED EARNINGS PER SHARE
Weighted average shares outstanding 3,289,564 3,287,355
Dilitive effect of:
Stock options 94,603 99,379
Adjusted weighted average shares
outstanding 3,384,167 3,386,832
Diluted earnings per share $ 0.23 $ 0.46
--------------------- --------------------
</TABLE>
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 8435
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2825
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 34968
<INVESTMENTS-CARRYING> 36988
<INVESTMENTS-MARKET> 38162
<LOANS> 172784
<ALLOWANCE> 2195
<TOTAL-ASSETS> 266495
<DEPOSITS> 223710
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3591
<LONG-TERM> 7608
0
0
<COMMON> 3389
<OTHER-SE> 28198
<TOTAL-LIABILITIES-AND-EQUITY> 266495
<INTEREST-LOAN> 7921
<INTEREST-INVEST> 2281
<INTEREST-OTHER> 100
<INTEREST-TOTAL> 10302
<INTEREST-DEPOSIT> 4368
<INTEREST-EXPENSE> 4368
<INTEREST-INCOME-NET> 5934
<LOAN-LOSSES> 256
<SECURITIES-GAINS> 21
<EXPENSE-OTHER> 4177
<INCOME-PRETAX> 2232
<INCOME-PRE-EXTRAORDINARY> 2232
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1574
<EPS-PRIMARY> .48
<EPS-DILUTED> .46
<YIELD-ACTUAL> 0
<LOANS-NON> 754
<LOANS-PAST> 633
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2097
<ALLOWANCE-OPEN> 2029
<CHARGE-OFFS> 109
<RECOVERIES> 19
<ALLOWANCE-CLOSE> 2078
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
